Corp. is considering investing $50,000 in equipment to produce a new product. Th

Question

Corp. is considering investing $50,000 in equipment to produce a new product. The useful service life of the é ent is estimated to be 10 years, with no salvage value. Straight-line depreciation is used. Harris estimates roduction and sale of the new product will increase net income by $$,000 per year. What is the expected rate that product of return on average investment in this equipment? 2.5% b. 15% c. 20% d. 25% 7 Fox Corp. is considering purchasing equipment costing $109,000 with an estimated life of 3 years and no salvage value. The net after tax cash flow from the project for each of the 3 years is expected to be $45,000. Fox's cost of capital is 10%. Compute the net present value of the equipment. Present value of $1 due in 3 years, discounted at 10%, is 0.751. Present value of $1 received annually for 3 years, discounted at 10%, is 2.487. a $2,548 h $2,915 c S3,213 d. $3,616 nt yalue method for evaluating an investment, an increase in the required rate of return tha net nresent meth

Explanation / Answer

Question 96). Answer :- Option c). 20 %

Explanation :- Average investment = (Initial investment + Scrap value) / 2

= (50000 + 0) / 2

= 50000 / 2

= $ 25000.

Return on average investment = (Net income / Average investment) * 100

= (5000 / 25000) *100

= 0.20 * 100

= 20 %

Conclusion :- Return on investment = 20 % (Option c).

Question 97). Answer :- Option b). $ 2,915.

Explanation :-

Net present value (NPV) of equipment = Present value of cash inflows - Present value of cash outflow.

= 45000 * Cumulative present value factors for three years at discount rate of 10 % - 109000.

= 45000 * 2.487 - 109000

= 111915 - 109000

= $ 2,915.

Conclusion :- Net present value (NPV) of equipment = $ 2,915 (Option b).

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